Conoco To Acquire Gulf Canada

Conoco Inc. and Gulf Canada Resources Limited announced that their boards of directors have unanimously approved an acquisition agreement under which a wholly owned Canadian subsidiary of Conoco will acquire Gulf Canada for C$12.40 (US$8.02(a)) per ordinary share in cash, or approximately C$6.7 (US$4.3) billion in total equity. Conoco also will assume approximately C$3.1 (US$2.0) billion of Gulf Canada's net debt, preferred stock and minority interests. The transaction price represents a premium of 35 percent over Gulf Canada's closing stock price of C$9.18 on Friday, May 25, 2001.

The acquisition will be immediately accretive to Conoco's earnings and cash flow per share, taking into account normal purchase accounting adjustments for unproved properties, goodwill and anticipated cost savings. The transaction is expected to close in the third quarter.

With the addition of Gulf Canada's proved reserves of over 1 billion barrels of oil equivalent (BOE), Conoco's total worldwide reserves (including syncrude) will increase almost 40 percent to 3.7 billion BOE. Total worldwide production will increase 32 percent to 335 million BOE in 2001. The estimated cost per proved BOE of the transaction is US$6.21. The acquired properties offer the potential to add 1.2 billion BOEs from probable reserves already identified. The combination will increase Conoco's North American natural gas production and proved reserves by 50 percent to 1.4 billion cubic feet per day (BCFD), and 4.1 trillion cubic feet (TCF) net, respectively. Conoco's proforma North American liquids production (crude oil, syncrude and NGLs) will more than double and its proved North American liquids reserves will more than triple as a result of this transaction.

Conoco Chairman and CEO Archie W. Dunham said, "I'm excited that Dick Auchinleck and I have agreed to combine two impressive energy portfolios and highly performing companies, significantly expanding Conoco's presence in North America and Southeast Asia. The acquisition of Gulf Canada will increase Conoco's North American proved natural gas reserves and production by more than 50 percent and establishes Southeast Asia as a strong, fourth core business area with the addition of Gulf Canada's interest in Gulf Indonesia Resources Limited. The transaction is consistent with our strategy to rapidly grow the natural gas portion of our portfolio.

"In addition to the acquisition being immediately accretive to earnings and cash flow, each company will bring a strong, long-term production growth profile to the expanded company. Ninety-five percent of Conoco's proven reserves will be positioned in our four core areas of North America, Southeast Asia, Europe and northern South America. Gulf Canada's growth initiatives in Canada and Southeast Asia add further strength and balance to our significant Gulf of Mexico deepwater and Venezuelan positions and programs in the Middle East, Caspian Sea and West Africa.

"Gulf Canada's significant Canadian operations are a great fit with our current operations and consistent with our strategic direction. Over the past two years, we have acquired interests in natural gas producing and processing properties in Canada. The management of Gulf Canada have greatly strengthened their operating portfolio and balance sheet during the last few years, and we consider the Gulf Canada management team and employees a major asset in this transaction," Dunham added.

Auchinleck, Gulf Canada President and CEO said, "The transaction that we have announced today with Conoco provides value to our shareholders that reflects the significant turnaround that has taken place at Gulf Canada. Our employees also will benefit from the opportunity that comes from being part of a larger company. I have found that the two companies share many common values -- not only their treatment and respect for employees, but also in the areas of environmental protection, support for communities where we work and an ongoing commitment to deliver value for shareholders."

Auchinleck said he has agreed, for a reasonable transition period, to manage the combined Canadian company and maintain his current position on the board of Gulf Indonesia Resources Limited.

Examples of enhanced upstream operations and expanded long-term growth profile include:

  • Conoco's North American natural gas production and proved reserve base will increase by 50 percent, solidifying its position as a major North American gas competitor.
  • Conoco will add nearly 1.4 TCF of net proved gas reserves and an additional 2.9 net TCF of probable gas reserves in North America.
  • Conoco will have significant production and strategic positions in three of the premier natural gas basins in North America: Western Canada, the San Juan Basin, and the South Texas Lobo Trend.
  • Longer term, Gulf Canada's four million acres of undeveloped land in Western Canada and leading position in Canada's Mackenzie Delta will augment Conoco's ongoing North American natural gas development program.
  • Conoco's North American liquids production, including crude oil, syncrude, and NGLs, will more than double, and its proved liquids reserve base in North America will more than triple. This transaction adds substantial long-term liquids revenues to Conoco, and Conoco's Rocky Mountain and Mid-Continent refining capacity provides a ready market for Gulf's western Canadian conventional and heavy crude oil production.
  • Southeast Asia will become a fourth core area for Conoco, through Gulf Canada's 72 percent interest in Gulf Indonesia Resources Limited.
  • Conoco will more than double its Southeast Asia proved reserves to 365 million BOE (net), and more than triple 2000's total net production from the region. In addition, Conoco will gain access to 1.5 TCF of probable reserves in the region.
  • The companies will have major long-term natural gas sales contracts in Southeast Asia for delivery of 3 TCF (net), with production exceeding 400 million cubic feet/day (net) in 2005.
  • Gulf Canada's recent exploration successes on the island of Sumatra, in the Natuna Sea and offshore Java will complement Conoco's recent discoveries and current positions in Indonesia, Vietnam and Malaysia.
  • Conoco will acquire a 9 percent interest in Syncrude Canada, Ltd., a joint venture that produces and upgrades heavy tar sands into light, sweet crude oil.
  • Production is expected to be net 22,000 BPD in 2001, with approved plans to increase by 30 percent to net 32,000 BPD in 2005.
  • Syncrude has unbooked resource potential of 5 billion barrels of oil (400 million barrels net).
Under the terms of the agreement, a wholly owned Canadian subsidiary of Conoco will commence a tender offer shortly to purchase all outstanding ordinary shares of Gulf Canada for C$12.40 (US$8.02) per share in cash.

Gulf Canada's board has unanimously voted to recommend that all Gulf Canada shareholders tender their shares into the offer. Upon the expiration of the tender offer, Conoco intends to acquire the balance of Gulf Canada's ordinary shares by statutory acquisition or a second step transaction for the same cash price as the tender offer.

Initial acquisition financing has been arranged. Conoco remains committed to a strong balance sheet. The transaction's highly accretive cash flow coupled with reduced capital spending and dispositions will enable the company to quickly reduce a significant portion of the acquisition-related debt. The company also said it will suspend its share repurchase plan.

The transaction is expected to result in annual pre-tax cost savings of approximately US$150 million to be achieved primarily through high-grading exploration opportunities, and administrative and operating cost reductions. The companies anticipate that any workforce impact can be accomplished through attrition, filling global vacancies and reduced hiring.

Conoco is headquartered in Houston. The combined company's Canadian headquarters will remain in Calgary.

The acquisition is subject to United States and Canadian regulatory approvals. Conoco expects to mail definitive tender offer materials to Gulf Canada shareholders and make all necessary regulatory filings shortly. Under certain circumstances, Gulf Canada has agreed to pay Conoco a breakup fee of C$220 million.

JPMorgan acted as financial advisor in connection with this transaction and provided a fairness opinion to the Board of Directors of Conoco. Cravath, Swaine & Moore and Blake, Cassels & Graydon LLP acted as legal counsel to Conoco. Merrill Lynch & Co. and Goldman, Sachs & Co. acted as financial advisors in connection with this transaction and each provided fairness opinions to the Board of Directors of Gulf Canada. Bennett Jones, LLP and Haynes & Boone acted as legal counsel to Gulf Canada.

Gulf Canada is a Canadian-based independent exploration and production company, with primary operations in Western Canada, Indonesia, the Netherlands and Ecuador.


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